Follow the Money

DR. Ylönen is an Academy Research Fellow at the University of Helsinki’s Faculty of Social Sciences, funded by the Research Council of Finland, and holds the title of docent, equivalent to associate professor. His research covers tax havens, corporate tax avoidance, and the political power of management consultancies, and his current project examines the political lobbying of big tech firms in the European Union.

The Confluence: What first drew you to studying tax havens specifically?

Dr. Ylönen: I’d been following the topic for a long time, it was already the subject of my master’s thesis. After the 2008 financial crisis, tax havens became a major policy issue, with a lot of activity at the OECD around corporate taxation rules and opening up secrecy laws in these jurisdictions. I started my PhD in 2014, studying both the governance side of that and the hands-on corporate practices multinational corporations use to avoid their tax obligations.

The Confluence: A lot of our readers have probably heard the term “tax haven” mainly from Panama Papers headlines, and most of them will never be rich enough to use one. Why should they actually care?

Dr. Ylönen: The most commonly cited definition, from the OECD, is a country that imposes low taxes on foreign income, has high secrecy laws, and doesn’t fully cooperate with other countries on tax matters. But places like the Netherlands, or some U.S. states, facilitate legal tax avoidance for multinationals without being known for banking secrecy at all, so people sometimes call those “corporate tax havens” separately from the classic image of islands with palm trees, like Panama or the Cayman Islands. Delaware and the City of London, which has a lot of autonomy in how it’s governed, also play a major role.

Tax havens re-emerged as a major policy topic after the 2008 financial crisis, reinforced by leaks like the Panama Papers and LuxLeaks, once it became clear how much taxpayer money countries were losing to evasion and avoidance. There are other reasons to care too: financing of illegal activity like drug trafficking and human trafficking flows through these same channels, and there’s a real social justice question, since it’s usually wealthier, better-resourced people who can afford to use these arrangements, which can mean a lower-middle-class person ends up paying proportionally more tax than someone with a very high income.

And with the scale of the challenges we’re facing right now, wars, climate change, that money needs to be mobilized rather than sitting untaxed.

The Confluence: You’ve written about the “arm’s length principle,” the rule multinationals are supposed to use to price deals between their own subsidiaries. What’s that meant to do, and how does it end up working as a tool for avoiding tax?

Dr. Ylönen: Taxing power sits with individual nations, but multinationals plan their operations globally, so there’s a real question of how a company should price things it sells to itself, between subsidiaries in different countries. There are basically two approaches.

One is to invent a market price: you ask the corporation to price an internal sale as if the two subsidiaries were unrelated parties, which is where “arm’s length” comes from. The other, formulary apportionment, treats the whole multinational as a single global entity and divides taxing rights by factors like where production happens and where its customers are, which would sidestep the whole problem of profits being booked wherever’s convenient.

The trouble with arm’s length pricing, identified as far back as the 1920s at the League of Nations, is that for many products and services that only exist in that particular form within one company, there’s no real market price to compare against. That gives multinationals a lot of leeway to price internal sales however suits them, booking high profits in low-tax countries and minimal profits in high-tax ones. It’s been a persistent, unresolved problem for decades.

The Confluence: You’ve also written about cryptocurrency as a new home for what you call secrecy-seeking capital. Has crypto made old-style havens less relevant?

Dr. Ylönen: During the 2010s, the automatic exchange of financial information between tax authorities expanded a lot, including in many tax havens, and that greatly reduced the traditional ways of evading tax or laundering money through bank secrecy. But toward the end of the 2010s, in research we did in the Estonian context, cryptocurrencies were becoming a new tool for exactly that.

Crypto firms are a different animal: they’re nimble, and quick to relocate if regulation catches up with them, which requires real capability from tax authorities and police to monitor, capability that’s hard to build when the private sector is competing for the same talent with much higher salaries. The Financial Action Task Force, the central body regulating this space, has noted that state capacity to trace crypto transactions isn’t there, even in OECD countries, let alone the Global South, where the gap between governance capacity and the scale of the challenge is even bigger.

One thing I noticed recently, unrelated to my formal research: several online debit card providers, often based in Singapore, let you open an account with minimal checks as long as you only deposit cryptocurrency, which raises an obvious money-laundering question about who that service is really built for.

The Confluence: You’ve also studied Estonia’s e-residency program, which you’ve described as a commercialization of residency. What was actually being sold there, and to whom?

Dr. Ylönen: I went into it wanting to understand how it related to the commercialization of citizenship more broadly, countries selling permanent visas or citizenship to investors who put in a million euros or dollars. What I concluded was that Estonia was really selling access to its advanced e-governance systems: electronic signatures, forming a company online, opening a bank account remotely.

That edge was probably greatest in the late 2010s. Since then, commercial e-signature providers and fintech firms have made similar services widely available elsewhere, including from Singapore, so the advantage has diminished. And in the beginning, Estonia’s approach to verifying who its e-residents actually were was quite hands-off, which led to scandals and a critical audit report.

That pushed them toward much stricter checks, making remote banking noticeably harder than it used to be, partly because a country of 1.3 million people is sensitive about getting pulled into negative global attention.

The Confluence: Your work also touches on the political power of consulting firms. Are there concrete cases where their influence has shaped the very regulation meant to govern them?

Dr. Ylönen: The Big Four accounting and consulting firms, KPMG, PwC, Ernst & Young, and Deloitte, are supposed to keep an internal firewall between the government consulting work they do and the tax planning services they sell corporations. In Australia there’s an ongoing scandal where those firewalls were bypassed, with privileged information from government work used for the firms’ other consulting business.

Similar scandals have surfaced around McKinsey, which even got a full episode on the American show Last Week Tonight. The financial incentives are significant, a lot of money is on the table, and ambitious people chasing performance targets end up crossing lines that shouldn’t be crossed, repeatedly.

The fix has to include real state capacity: competitive salaries so skilled people don’t all leave for the private sector, strict rules against these conflicts of interest, and penalties large enough to actually hurt these firms’ business, not just a symbolic fine.

The Confluence: How does that kind of political lobbying compare in Europe versus America, where companies can donate directly to political parties?

Dr. Ylönen: The American case is its own thing, especially after a Supreme Court resolution on the Citizens United case opened the floodgates on campaign financing. The European Union is an amalgamation of different countries with a very different political system, so that kind of concentrated financial power is harder to build in the same way.

But big tech’s rise as the biggest lobbying spenders in Brussels has still been remarkably fast. Currently, Meta is the single biggest lobbyist in the EU. However, the actual sums aren’t huge relative to what these firms earn — Meta, for one, is spending something like ten million euros a year.

Much of what they’re doing is traditional lobbying: meetings, emails, often hiring former advisors to members of the European Parliament who know exactly how the system works. But what worries me more is how much funding goes into institutions that matter for democracy itself: academic research centers, journalism development programs, and think tanks that often have names signaling something like small-business advocacy, until you look closely and find a big tech firm behind them.

The fix needs strict cooling-off periods for policymakers moving into industry, real public financing for critical academic research, journalism, and watchdog groups, strict enforcement of the EU’s Digital Markets Act, Digital Services Act, and AI Act, and active industrial policy to build real alternatives to these platforms.

The Confluence: If you had to leave readers with a single takeaway, what would it be?

Dr. Ylönen: If you want to understand power in a society, following the money is usually a pretty good proxy. It’s not a magic bullet, but the groups that hold a lot of money tend to use it to steer the system in their favor, whether we’re talking about tax avoidance or the rules governing digital platforms.

The second thing is that money and technology get mystified, made to look like matters only highly paid professionals can discuss, and ordinary people shouldn’t bother. That’s usually a false assumption. Even when the technical details are genuinely complex, these questions boil down to fundamental issues about how resources, power, and voice are distributed in our societies, and that’s a discussion everyone can, and should, take part in.